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CHAPTER
STATEMENT OF CASHFLOW
Statement of cash flow
An accounting statement called the "statement of
cash flows" which shows the amount of cash
generated and used by a company in a given
period.
The statement of a business's cash flows is often

used by analysts to measure financial
performance.
Companies with ample cash on hand are able
to invest the cash back into the business in order
to generate more cash and profit.
Having ample cash on hand will ensure that

creditors, employees and others can be paid
on time. If a business or person does not have
enough cash to support its operations, it is said
to be insolvent, and a likely candidate for
bankruptcy.
Usefulness of the Statement of Cash
Flows
The statement of cash flows reports the cash
receipts, cash payments, and the net change in
cash resulting from the operating, investing, and
financing activities of a company during the
period. The information in a statement of cash
flows should help investors, creditors, and others
to assess:
The company’s ability to generate future cash
flows. By examining relationships between items
in the statement of cash flows, investors and
others can better predict the amounts, timing,
and uncertainty of future cash flows.
The company’s ability to pay dividends and
meet obligations. Employees, creditors,
stockholders, and customers should be
particularly interested in this statement because
it alone shows the flows of cash in a business.
The reasons for the difference between net
income and net cash provided (used) by
operating activities. Many financial statement
users investigate the reasons for the difference
between net income and cash provided by
operating activities and then they can assess for
themselves the reliability of the income numbers.
The investing and financing transactions during
the period. By examining a company’s investing
activities and financing activities, a financial
statement reader can better understand why
assets and liabilities increased or decreased
during the period.
Distinguish Among Operating, Investing, and
Financing Activities
The statement of cash flows classifies cash

receipts and cash payments into operating,
investing, and financing activities. Transactions
within each activity are as follows:
Operating activities include the cash effects of
transactions that create revenues and expenses
and thus enter into the determination of net
income.
Investing activities include (a) purchasing and

disposing of investments and productive long-
lived assets using cash and (b) lending money
and collecting the loans.
Financing activities include (a) obtaining cash
from issuing debt and repaying the amounts
borrowed and (b) obtaining cash from
stockholders, repurchasing shares, and paying
dividends.
Operating activities is the most important

category because it shows the cash provided or
used by company operations.
Cash provided by operations is generally
considered to be the best measure of whether a
company can generate sufficient cash to
continue as a going concern and to expand.
Types of Cash Inflows and Outflows
Operating activities
Cash inflows:
From sale of goods or services.
From interest and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for services.
To government for taxes.
To lenders for interest.
To others for expenses.
Investing activities : changes in investments and
long-term assets
Cash inflows
• From sale of property, plant, and equipment.
• From sale of investments in debt or equity securities of
other entities.
• From collection of principal on loans to other entities.
Cash outflows
• To purchase property, plant, and equipment.
• To purchase investments in debt or equity securities of
other entities.
• To make loans to other entities.
Financing activities: changes in long-term
liabilities and stockholders’ equity
Cash inflows:
• From sale of equity securities (company's own
stock).
• From issuance of debt (bonds and notes).
Cash outflows:
• To stockholders as dividends.
• To redeem long-term debt or reacquire capital
stock (treasury stock).
Liquidity is the ability of a business to meet its
immediate obligations.
• One measure of liquidity is the current

ratio. Current ratio is computed by dividing current
assets by current liabilities.
A disadvantage of the current ratio is that it

uses year-end balances of current assets and
current liabilities, which may not be
representative of a company's position during
most of the year.
A ratio that partially corrects this problem is
the current cash debt coverage
ratio, computed by dividing cash provided
from operating activities by average current
liabilities.
• Because cash from operations involves the entire

year rather than a balance at one point in time, it
is often considered a better representation of
liquidity on the average day.
Current Cash Debt Coverage Ratio = Cash
Provided by Operations / Average Current
Liabilities
Current Cash Debt Coverage Ratio =

4,626/(14,969 + 13,974)/2= 1.01 times
Current cash coverage ratio Current ratio
Microsoft 1.01 times 4.71:1
Oracle .75 times 2.65:1

Solvency is the ability of a firm to survive over
the long term.
• One measure of solvency is the debt to total assets

ratio.
• A measure of solvency that uses cash figures is
the cash debt coverage ratio--the ratio of cash
provided by operations to total debt as
represented by average total liabilities.
• This ratio measures a company's ability to repay its
liabilities from cash generated from operations.
The cash debt coverage ratio for Microsoft is
computed as follows:
Cash Debt Coverage Ratio = Cash Provided

by Operations / Average Total Liabilities
Cash Debt Coverage Ratio = 14,626/
(17,564+ 16,280)/2= .85 times
THE END

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CHAPTER

The statement of a business's cash flows is often

Having ample cash on hand will ensure that

The statement of cash flows classifies cash

Investing activities include (a) purchasing and

Operating activities is the most important

• One measure of liquidity is the current

A disadvantage of the current ratio is that it

• Because cash from operations involves the entire

Current Cash Debt Coverage Ratio =

Microsoft 1.01 times 4.71:1

Oracle .75 times 2.65:1

• One measure of solvency is the debt to total assets

Cash Debt Coverage Ratio = Cash Provided

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